Tag: Antitrust

“U.S. appeals court revives antitrust lawsuit against Apple,” goes the headline of a recent Reuters story. This is just the most recent example of a long line of government acts of persecution of businesses for the “crime” of trading with consenting customers on mutually agreed terms. Continue reading “Abolish Antitrust”

In an August 9 email to participants of Kindle Direct Publishing, Amazon argued that publishers should price their ebooks at $9.99 or less and that the publisher Hachette is wrong to try to price them higher. Amazon sanctioned the antitrust action against Hachette and other publishers regarding ebook pricing, claiming:

Hachette has already been caught illegally colluding with its competitors to raise e-book prices. . . . Colluding with its competitors to raise prices wasn’t only illegal, it was also highly disrespectful to Hachette’s readers.

Amazon may be right or wrong about the economics of ebook pricing, but it’s definitely wrong about the moral propriety of antitrust action. Book publishers and all other businesses have a moral right to contract and otherwise associate voluntarily with suppliers, other businesses, and customers. Anyone who feels “disrespected” by a business’s actions is properly free to stop associating with that business and seek to do business elsewhere. When, under antitrust laws, government sues, fines, or otherwise punishes companies for doing what those companies have a moral right to do, government becomes the violator of rights. (See also my article for the Objective Standard, “The Government’s Obscene Assault on Apple.”

Amazon’s sanction of antitrust action is immoral and especially self-destructive given Amazon’s own susceptibility to antitrust actions. In 2008, Amazon was itself hit with an antitrust suit: BookLocker.com “filed a class action lawsuit against Amazon.com in response to Amazon’s . . . attempts to force [sic] all publishers using Print on Demand (POD) technology to pay Amazon to print their books.” (Amazon settled the suit in 2010.) And recently “German book publishers . . . filed a complaint with the country’s antitrust authority against Amazon, accusing it of violating competition laws and asking the government to investigate,” the New York Timesreports.

What of Amazon’s economic case for lower-priced ebooks? The company states:

[E]-books are highly price elastic. This means that when the price goes down, customers buy much more. We’ve quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99.

No doubt this is true for many ebooks, but it is not necessarily true of all ebooks. Some books are highly specialized, and its readers tend to buy them regardless of the asking price (within a wide range). In those cases, a publishing company might do better by charging more per copy. In other cases, a publisher might do better to charge far less than $9.99 per copy.

If Amazon does not wish to carry ebooks priced higher than $9.99, then Amazon has a moral right not to do so—but not to initiate physical force (or sanction government force) against publishers to make them lower their prices. And if publishers wish to price their ebooks at a higher price, they have a moral right to do so—but not to force Amazon to carry them. And the sole proper role of government in this area is protect people’s rights to do business, when they choose to do so, by mutual consent.

This set of review questions is part of the Liberty In the Books program, a monthly discussion group. These questions cover two works by Eric Daniels on antitrust that go well together for a single meeting. These essays are part of a cycle on antitrust. Previously I published questions for Alex Epstein’s essay, “Vindicating Capitalism: The Real History of the Standard Oil Company.” In the future Liberty In the Books will cover Dominick Armentano’s book, Antitrust: The Case for Repeal.

The first work covered here is Daniels’s essay, “Reversing Course: American Attitudes about Monopolies, 1607-1890.” It is contained in the book The Abolition of Antitrust, edited by Gary Hull.

As noted previously, these review questions are intended to inspire discussion of the material, not establish a tight outline for discussion.

Reversing Course

1. What was the general change in federal economic policy from the mid 1800s to the early 1900s? (Pages 63, 65-66)

2. What was the most common understanding of “monopoly,” before and after 1890? (Page 64)

3. What were the English origins of monopolies? (Page 67)

4. What was the nature of the English revolt against monopolies? (Pages 67-68)

5. What was the significance of the English Case of Monopolies and subsequent Parliamentary action? (Pages 68-69)

6. What was the colonists’ view of monopolies? (Pages 69-70)

7. What was the fundamental ideological conflict that divided the English Parliament and the colonists? (Pages 70-71)

8. What was the position of state constitutions on monopolies? (Page 71)

9. According to Daniels, what is the difference between American patent law and the establishment of coercive monopolies? (Pages 71-72)

10. In what ways was the Constitutional Convention friendly toward monopolies? What were the concerns about monopolies raised in that debate? (Page 73)

11. In what ways, and on what grounds, did Congress empower monopolies? (Page 74)

12. How did Alexander Hamilton, Daniel Webster, and Joseph Story defend monopolies? How did their arguments lead from protecting coercive monopolies to breaking up large free-market businesses? (Pages 75-76)

13. How did free enterprise challenge coercive monopolies? (Page 76)

14. How did the fight over the steamship monopoly play out? What was the impact of the 1824 Supreme Court ruling in Gibbons v. Ogden? (Pages 77-78)

15. What were the arguments that continued to be made in favor of monopolies in the 1800s? (Pages 78-79)

16. What was the Charles River Bridge case, and what was the significance of the arguments made in that case? (Pages 79-83)

As I wrote last month, I’ve stopped doing business with Redbox, the DVD kiosk service, because that company initiated antitrust actions against film companies.

Last week I learned that NCR has acquired DVDPlay and plans to convert those “kiosks to its BLOCKBUSTER Express brand.” It turns out that, in my region, these kiosks are placed in many Safeway stores.

On December 17, I sent the following e-mail to NCR:

Dear Mr. Dudash,

I no longer do business with Red Box because that company initiated antitrust actions against others, and I regard such action as unjust and a violation of individual rights.

Before I decide whether to do business with NCR/ DVDPlay, I’d like to know whether your company has initiated any antitrust actions or intends to do so. I will be happy to publish your response, and to make my consumer decisions accordingly.

Sincerely,
Ari Armstrong

Today I received the following reply:

Hi Ari, we have not initiated any lawsuits against the movie studios at this time. We have said publicly that we do not believe that is the right approach, and we are instead working with the studios to find a solution that addresses their needs, our needs and — most importantly — the needs of our consumers.

However, as I’m sure you can understand, I cannot comment on what actions we may or may not take in the future. But, certainly, we have not filed any lawsuits to date and have said publicly that we do not agree with the approach of litigation.

Jeff

Jeff Dudash
Public Relations
NCR

That is certainly good enough for me. I have already rented two videos from DVDPlay to see how the system works, and now I plan to rent from the service regularly.

The DVDPlay kiosk worked very well. The problem is that the consumer cannot view DVD availability by kiosk online, nor can the consumer reserve a rental online. Redbox allows both of these things, which makes that service quite a lot more useful. Hopefully, once the conversion to Blockbuster is complete, the service will upgrade its online capabilities. (I asked Dudash about this and will update this post if he answers.)

After I dropped Redbox, I upgraded my Netflix account from one-at-a-time DVD rentals to three-at-a-time. Now that I’ve found DVDPlay, I’ve reduced my Netflix account to a the single disc plan.

I figured that, while I was at it, I’d ask Netflix about its business plans. It seems to me that Netflix could offer the best of both worlds by renting DVDs through the mail and charging an additional per-rental fee for online new releases.

Right now Netflix rents DVDs for a monthly fee and offers online content at no additional charge. I’ve found some outstanding online offerings this way, such as Jim Henson’s The Storyteller. But Netflix offers none of the hot new releases online.

Obviously Netflix also rents new releases by mail. The problem is that they tend to be delayed. I dropped the new Terminator film and Hangover from my Netflix list and rented them from DVDPlay. Currently Inglourious Basterds is listed on my Netflix queue as a “very long wait,” as is Four Christmases.Public Enemies and Julie & Julia are listed as “long waits.” My plan is to remove all these films from my Netflix queue and rent them at DVDPlay (if available).

Meanwhile, Amazon and iTunes rent new-release movies online for $3.99. So I can pay a dollar at DVDPlay, or I can pay four times as much to view the same content through my cable modem. For me, this is no contest. The kiosk is within easy walking distance, and I like to walk around, anyway. While I have rented many movies from kiosks, I have paid not one red cent for online video rentals (not counting the online content included with my Netflix membership).

Is Netflix planning to compete with the kiosks and with the online rental sites for new-release business? No.

I called up Steve Swasey, Netflix’s Vice President of Corporate Communications. He graciously took my call. He said that Netflix is and intends to remain a subscription-based company. He pointed out that Netflix has been growing despite the competition.

Moreover, Swasey said that Netflix users tend to be more interested in the company’s deep catalog and excellent customer service. (I readily granted that these are strong points for the company.) Swasey sensibly said that “a great release from 1974 is a great movie,” whereas a new release may not be so great. With Netflix, he said, customers can find older movies “tailored to you.” As examples, he noted that the films Crash and Hotel Rwanda have been Netflix favorites. (I hated the first film and appreciated the second.)

Swasey said that “new releases just aren’t that important to most Netflix users,” who instead enjoy the large catalog, tailored recommendations, and “extreme simplicity” of the monthly subscription.

As much as I enjoyed talking with Swasey and appreciate his perspective, I just don’t buy his rationale. I think it would be in Netflix’s interests to offer pay-per-view online rentals for new releases.

I would gladly pay Netflix an extra couple bucks to watch a new release online, rather than wait for weeks for the DVD or deal with a kiosk. This would be an added service, so only customers who wanted it would have to worry about it. Everyone else could maintain the “extreme simplicity” of the monthly subscription. (I don’t regard online rentals as terribly complicated or confusing.)

I think it’s obvious to everybody that the DVD is a dated medium. Its days are numbered. So, within a few years (I don’t care to guess precisely how many), both DVD kiosks and the Netflix mail service will be aborted. Interestingly, NCR plans to enable consumers “to download movies from the kiosks to portable memory cards,” but I don’t see how this will ultimately compete with online rentals.

DVDs must be produced and physically distributed, whether by store, mail, or kiosk. They break. They cost money on top of the digital content. Meanwhile, as streaming costs go down, the marginal production cost of an online rental will drop closer and closer to zero.

Obviously Netflix is aware of this, as the company has already started offering online content. The problem is that Netflix wants to limit the number of any particular disc it buys, which is why new releases end up with “very long waits.” Yet Netflix can’t offer unlimited new releases online for $8.99 per month, which is the minimum plan for unlimited online viewing.

As I suggested to Swasey, I think the reason a lot of Netflix users aren’t as interested in new releases from Netflix is simply that it’s difficult to get them there, and, like me, they use some other service for new releases.

At some point Netflix is going to have to figure out how to offer new releases via online rentals, if the company wishes to continue to exist. Here’s my ideal plan: I pay $8.99 per month for unlimited online viewing of older content, plus $1.99 per viewing of a hot new release. (New releases could drop into the general pool after a certain number of weeks.) Under such a scheme, I would give Netflix 100 percent of my video rental business.

The problem for Netflix is getting from here to there. The company is stuck in a “Netflix hole” in which new releases are largely inaccessible to members.

How to solve this problem? Here is my suggestion. Netflix can keep its current plan for whoever wants to keep using it. Then Netflix can create an entirely new, online-only plan, as described above (monthly fee plus a modest pay-per-view fee on new releases).

Update: Here’s another obvious approach: Netflix could offer a standard online video program for, say, $9 per month plus pay-per-view on new releases, and a premium program that includes unlimited viewing of new releases for, say, $20 per month. That way, people who care nothing about new releases, or who only want to watch them occasionally, can sign up for the less-expensive account, while others can pay more for full access.

That, Mr. Swasey, is what I call “extreme simplicity” — and a business model that would vault Netflix to the top of the competition.

Until then, I will be happy to do new-release business with NCR, which has, at least for now, sworn off unjust antitrust actions.

I strongly recommend that free-market activists join a reading group in their area — or start a new one. See my notes for some ideas about how to do that. (Alternately, if you live out in the boondocks, you can follow the Denver group’s lead on your own.)

Following are my review questions that we used to guide our discussion. Remember, the point of review questions is to inspire discussion and keep it basically attached to the assigned reading. There is no need to discuss every question on the list. Page numbers here refer to the printed edition; I also include the section headers. This reading, assigned in advance of our meeting, worked great for a two-hour discussion.

The following article was originally published online by the Denver Post under the title, “Why we should keep selling low-priced books.”

Outlawing low-priced books robs your wallet and freedom

by Ari Armstrong

Some stores sell popular books to willing customers at low prices, and they must be stopped! At least that’s what the American Booksellers Association (ABA) argued in an October 22 letter to the Antitrust Division of the Department of Justice.*

The letter, signed by the ABA Board of Directors, including Cathy Langer of Denver’s Tattered Cover, complains that Amazon, Wal-Mart, and Target sell some “hardcover bestsellers,” including books by John Grisham and Sarah Palin, for only around $9. Moreover — horror of horrors — Amazon sells digital books for only $9.99.

The letter argues that selling low-priced books to people who want to buy them constitutes “illegal predatory pricing that is damaging to the book industry and harmful to consumers.”

You might think that “lower prices will encourage more reading and a greater sharing of ideas in the culture,” but you would be wrong, the ABA claims. Low-priced books will drive out “many independent bookstores,” put book buying “in very few hands,” and eventually allow “mega booksellers to raise prices,” the ABA asserts.

The ABA’s position ultimately is self-destructive. Free speech, and freedom of conscience more broadly, depends on property rights and voluntary association, liberties the ABA undermines.

Writers, publishers, sellers, and buyers have the right to agree to terms they find mutually beneficial. A publisher that wishes to prevent a retailer from selling a book below a certain price may properly set that as a condition of the transaction.

Once a retailer purchases books from a willing publisher without pricing restrictions, the retailer properly has the right to sell the book for any amount it deems proper. If the retailer wants to sell books below cost as a loss leader, give them away, or pay people to take them, that’s between them and their customers.

When politicians control the physical conveyance of ideas, they can control the ideas themselves. As a villain in Ayn Rand’s Atlas Shrugged explains, “If you breathe the word ‘censorship’ now, they’ll all scream bloody murder… But if you leave the spirit alone and make it a simple material issue — not a matter of ideas, but just a matter of paper, ink and printing presses — you accomplish your purpose much more smoothly.”

The ABA helps establish the principle that people with guns — for ultimately brute force is what imposes Department of Justice rulings — can invalidate people’s independent decisions. This same principle opens the door to outright censorship.

The ABA’s position also rests on economic myths. Part of the cost savings of large retailers comes from publishers selling books in large orders. The ABA would force publishers and readers to eat the costs of more tiny orders.

Independent bookstores that cannot compete on price should find other ways to attract willing customers if they wish to stay in business. For example, Tattered Cover hosts many public events featuring authors and other speakers. (I spoke at a media panel hosted by the store on September 24.) Tattered Cover also carries a large selection of books that customers can physically look at and buy instantly.**

The ABA’s suggestion that “mega booksellers” would eventually “raise prices” higher than what independent stores now charge is laughable. Not only will many competing booksellers remain in business despite low-priced books, but attempts to raise prices inevitably attract new competitors.

The ABA absurdly argues that low-priced books will cut off writers’ ability to get published. As a book author, I can attest that writers today have unprecedented opportunities to publish their works. Amazon is particularly friendly to writers and publishers.

Tattered Cover does not carry my book, and if I had to rely on independent bookstores my book never would have been published. Yet I did not seek government action to force Tattered Cover’s decisions. Tattered Cover has the right to stock the books it wants at the prices it wants, and it should respect the rights of others to do likewise.

We should expect better from the ABA and from Tattered Cover, often a champion of free speech in Colorado. Ultimately the business of ideas depends upon the integrity of the unforced mind.

Ari Armstrong is the author of Values of Harry Potter and publisher of FreeColorado.com. He lives in Westminster.

** November 13 update: As somebody noted in the comments, Tattered Cover now plans to sell used books as well. The Denver Post has the story. Offhand this strikes me as a good idea. The standard fee for shipping and handling for used books at Amazon is $3.99, sometimes more than the price of the book. Tattered Cover can’t offer as wide a selection of used books, but the customer can physically examine the used book and get it right away with no additional transport costs.

I just upgraded my Netflix account, and I’ll no longer use Redbox, the DVD vending service that I’ve used at the local McDonalds.*

A few days ago I learned about “Redbox’s antitrust case against several major studios.” Redbox is seeking to force the terms by which studios sell videos, and that is wrong. A contract properly involves the voluntary consent of both parties. Redbox is trying to replace voluntary consent with political force.

And Redbox will not get another dollar of mine until it drops its antitrust suits. I called Netflix, on the other hand, and was assured by customer service that Netflix is not involved in any antitrust actions.

Redbox Files Federal Lawsuit Against Warner Home Video
For Immediate Release: August 19, 2009
Oakbrook Terrace, Ill. – Redbox Automated Retail, LLC, filed suit in Delaware Federal Court against Warner Home Video on Tuesday, August 18, 2009, to protect consumers’ rights [sic.] to access new release DVDs. Redbox filed the action in response to new distribution terms imposed by Warner Home Video that would prohibit redbox from providing consumers access to Warner Home Video titles until at least 28 days after public release. …

Federal Court Rules redbox Can Pursue Antitrust Suit Against Universal Studios Home Entertainment
For Immediate Release: August 17, 2009
Oakbrook Terrace, Ill. – The United States District Court for the District of Delaware announced today that it has denied Universal Studios Home Entertainment’s motion to dismiss the antitrust lawsuit filed by redbox. …

The Obama administration has signaled that it will ramp up antitrust persecutions. Predictably, various unscrupulous business have sought to take advantage of this by trying to get the federal government to step on competitors and suppliers. This is wrong. Businesses should respect private property and voluntary trade, not try to override people’s rights with political force.

* I just called McDonalds corporate and was told that that its contract with Redbox has ended, so it’s unclear to me whether any or all Redbox machines will be pulled from McDonalds locations. My local McDonalds still has an operating machine. Redbox also operates out of select local Walmarts and grocery stores. Update: I just learned from a local King Soopers manager that Redbox will expand into some of those stores.